AbbVie: Is Shire Just Playing Hard to Get?

British drug maker Shire (SHPG) turned up its nose at the $46.5 billion offer by U.S. rival AbbVie (ABBV), in the latest move by a U.S. company to pursue a deal for a company with a lower tax rate. Simply put, Shire says the bid is to low and released ambitious new targets to more than double its annual sales to $10 billion by 2020.

What will it take to get the deal done?

Leerink analyst Jason Gerberry says AbbVie's cash and stock offer is lacking in certain areas, namely the stock component is too high and there's no contingent right value to reward Shire shareholders for pipeline assets that could pop down the road. He writes:

We believe the race for doing tax inversions will only accelerate, which works in SHPG's favor, meaning demand for SHPG will be high and SHPG should seriously considering accepting a slightly higher offer that is more cash-rich and also allows shareholders to enjoy the potential upside if products like Premiplex or lifitegrast get approved. Next steps: ABBV will need to announce its firm intention to make another offer by 7/18. Other potential acquirers we could envision stepping in include AGN, PFE, and BMY.

AbbVie said Friday that it had made three cash-and-share proposals to the board of Shire, with the latest valued at $78.87 for each Shire share. The North Chicago, Ill.-based drug maker said discussions were no longer ongoing and offered no guarantee of another offer.

AbbVie’s proposal comes amid a wave of interest in such so-called tax inversion deals, most prominently Pfizer's (PFE) failed $120 billion attempt to buy AstraZeneca (AZN). U.S. medical-device company Medtronic (MDT) on Sunday agreed to buy the U.K.‘s Covidien (COV) for $42.9 billion, also in part to lower its tax rate.

Buying Shire is about more than lowering AbbVie's tax bill. The deal reduced Shire's reliance on Humira sales before the patent protecting the arthritis drug expires in 2016.

But the Humira patent expiration puts AbbVie's stock at risk. Under the latest deal terms, Shire shareholders would receive just over half of the proposed purchase price in AbbVie shares.

Meanwhile, Sen. Ron Wyden has announced plans to crack down on corporations that shift their tax addresses overseas through tax inversion deals, adding more risk to the deal, says Leerink's Gerberry. He writes:

The current ABBV deal consists to 56% equity and 44% cash. We suspect SHPG may have issue with taking ABBV stock given uncertainties around Humira (auto-immune) biosimilar risk – the composition of matter patents expire in the US and EU in 2016 and 2018, respectively, but other IP may come into play. Also, with the Wyden tax proposal seeking to retroactively undo inversion status for deals occurring post May 8, 2014, if they fail to meet higher equity thresholds (50% equity for foreign target in NewCo), we believe SHPG is likely looking for a "termination clause" or some other risk mitigation device to reflect risk the NewCo is treated as a US company that cannot avail itself of the benefits of UK tax law.

Shire shares rose 16.7% to $223.85, while AbbVie fell 1%.